CRYPTO ANALYSIS ---> Fundamental vs. On-Chain vs. Technical
How do you analyze cryptocurrencies?
When I ask fellow investors how they look at cryptocurrencies before they invest, I'm amazed at the total lack of analysis that takes place. Most investors I know look at the token's price and perhaps recent price history, and mix in a bit of "gut" to make a decision. Want to guess what happens when someone makes an uninformed decision? The outcome is usually not good.
I get it, analyzing crypto takes two things you do not want to put in - time and effort. In reality, if you understand some basics the tools are there to limit how much of each of those two precious resources to extend when looking into crypto. But hey, that tip on Reddit looks pretty good and certainly lines up well with what you are reading on Discord.
Each week I publish two recurring articles, Bitcoin Weekly (Mondays) and Ethereum Weekly (Fridays), and I'm always torn if I should add various types of analysis to them. I'm not sure if readers know what a "death cross" is and what it means to the future direction of BTC or ETH. I do not want to add this type of analysis if readers will immediately dismiss it. As a result, I often will add only a single paragraph containing meaningful analysis and typically focus on a basic technical indicator like RSI (relative strength index) which is fairly simple and pretty easy to grasp in terms of general coin/token momentum.
While I'm not going to dive deep into any analysis measurements, I do think it is important to understand some of the different kinds of analysis used and some basic things to look at in each category.
Fundamental Analysis
Fundamental Analysis is probably the easiest starting point as it goes over some basic information that you may already have some idea about. Have you heard of market capitalization? If you know the total value of all of the token's worth, then you already understand one fundamental analysis factor.
I'm sure you have heard the total crypto market capitalization sits around the 1.2 trillion mark. If we dive into Bitcoin, we can see that it currently accounts for roughly 44% of the total market which equates to more than $500B. You also probably know that only 21 million BTC will ever be produced. Guess what? Without realizing it you know some fundamental analysis surrounding Bitcoin.
If you read my weekly column on Bitcoin, you know that over 92% of the total supply of BTC is already circulating. Now if you pair your fundamental analysis of Bitcoin with the realization that supply and demand drive prices, the long-term outlook for the largest cryptocurrency is quite bright. Fundamentally, I'd say you are doing quite well - congrats!
On-Chain Analysis
I feel that On-Chain Analysis is the most misunderstood of the three despite most having at least heard the term. This analysis looks at the actual blockchain for verified data with a focus on investor or market sentiment to determine future price movement. By examining how capital flows within the blockchain at a micro level, you are trying to figure out what is happening on a fairly "macro" level in terms of investor attitudes towards the asset or token in question.
Let us consider Ethereum for this example. After the Shanghai, or Shapella upgrade, we can look at what is happening on the Ethereum blockchain. Since users are now able to unstake their Ether, we can use on-chain data to see if investors are selling their ETH or staking even more now that they have the flexibility to remove it when desired.
Are the number of addresses or wallets holding ETH growing rapidly? Where is the ETH being stored? Imagine you see a lot of ETH moving to centralized exchanges. That could mean a dump of ETH is about to occur. If ETH is being moved to wallets, that is likely to be held for longer durations. You can look on Etherscan, a software used to look at data visually, to see transaction details for ETH.
There is a number of on-chain analysis data that can be very helpful when deciding to invest or sell crypto. Basic data includes daily transaction volume and total value locked (TVL). One metric I really like to pay attention to is the supply of a coin or token that is in profit or loss. Investors invest to make a profit and when you see this metric tip in favor of profit you may see a jump in sales or profit taking putting downward pressure on an asset with the inverse also being true as those currently in loss with likely hold or even purchase more to bring their average cost down.
My go-to site for on-chain analysis is Glassnode and it is worth getting familiar with the data there given their 200+ metrics along with some nice research reports. I'd suggest starting there but there are other sites worth looking into, including Dune, which offers some great search capabilities for data but takes some time to master.
Technical Analysis
Technical Analysis is probably the best-known type of analysis in crypto. This may be due to the fact that we hear certain terms as it relates to other types of investments like stocks. At its most basic level, technical analysis typically involves looking at past data to help us determine what the future holds in store for any investment. If you are looking at something that looks like a chart you are likely looking at technical analysis.
There are lots of different figures you can look at but I tend to focus on five of the most popular if you read my articles which include:
Moving Averages is a simple metric that looks at the average crypto price over a set period of time, such as 50 or 200-days, to determine if the current price is over or under the average. There are variations including simple, exponential, and weighted, to explore and my advice would be to pick a metric or two to keep an eye on and get to know how an asset performs over time.
Relative Strength Index, or RSI, looks at the speed and direction of an asset to determine the price's momentum. The RSI will be a number between zero and 100 with below 30 indicating oversold and 70 indicating an asset that has been overbought.
Bollinger Bands, like RSI, is another momentum-based metric. The Bollinger Bands use standard deviation to determine the current price trend using two lines, a moving average to indicate a trend and a standard deviation band to indicate volatility.
Fibonacci Retracement is very interesting and based on the work of the Italian Mathematician Leonardo Fibonacci who lived in the tenth and eleventh centuries. This tool helps to identify an asset's support and resistance levels by plotting horizontal lines at key Fibonacci levels based on observations made in nature.
Moving Average Convergence Divergence, or MACD, is a type of analysis that utilizes moving averages to spot buying and selling opportunities. It is quite popular in stock trading and has gained popularity in crypto as well.
These are listed in the order that I typically use them with moving averages and RSI being the two technical indicators I use the most often due to their simplicity and relatively wide use. Other types of technical analysis include Ichimoku Cloud, On-Balance-Volume, stochastic oscillator, and the Aroon indicator which all have their pros and cons. I would suggest getting very familiar with some of the more basic technical analysis tools before tackling any of these more complex concepts.
Within technical analysis, you will often hear various patterns play out in the market. I'm sure you have heard of some terms, from ascending and descending triangles, to double tops or bottoms, to the dreaded death cross, all have their ardent supporters who believe they give a clear signal as to which way a given cryptocurrency is headed. While I do listen
Conclusion
If you are hardcore in analysis, good for you and this article was nothing more than a quick overview for you. If you are less familiar with the types of analysis discussed here pick a couple of metrics to keep an eye on and build up your comfort level before diving deeper or adding more tools. In my experience, none of these analysis tools in and of itself is comprehensive enough to make smart crypto investment decisions but looking at a group of them can be a great indicator of momentum and potential price movement.
If you are a high-volume trader or plan on becoming one, it is best to really nail down your strategy when analyzing crypto. If not, find indicators that you find useful and watch how your favorite coins/tokens metrics change over time. You can use metrics to take strategies, such as dollar cost averaging, to new heights and put market factors in your favor resulting in better long-term returns.